Question

New York Times Co. (NYT) recently earned a profit of $2.31 per share and has a P/E ratio of 19.75. The dividend has been growing at a 7.75 percent rate over the past six years.

If this growth rate continues, what would be the stock price in six years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 22 in six years? (Round your answers to 2 decimal places.)

Answer 1

Answer a.

EPS0 = $2.31
Growth rate, g = 7.75%

EPS6 = EPS0 * (1 + g)^6
EPS6 = $2.31 * 1.0775^6
EPS6 = $3.6151

P/E Ratio = Price in 6 years / EPS6
19.75 = Price in 6 years / $3.6151
Price in 6 years = $71.40

So, stock price in six years is $71.40

Answer b.

EPS0 = $2.31
Growth rate, g = 7.75%

EPS6 = EPS0 * (1 + g)^6
EPS6 = $2.31 * 1.0775^6
EPS6 = $3.6151

P/E Ratio = Price in 6 years / EPS6
22 = Price in 6 years / $3.6151
Price in 6 years = $79.53

So, stock price in six years is $79.53